1.) They’re Riskier Than Other Investments
While this was once true, if you’ve been following the economy recently, you know that’s no longer the case. In an age when blue chips like AIG or Lehman Brothers can swing just as wildly as the crankiest penny stock, even the big names are no sure thing.

To be fair, penny stocks are far from risk-free. But it’s that risk that brings with it the reward potential penny stocks are known for.

2.) They’re Hard to Buy
Just in case this myth wasn’t busted when I wrote Taming the Wild West of the Market back in May, I’m back to reiterate.

Buying penny stocks isn’t necessarily any harder than buying another type of investment. You just place a trade with your broker, or purchase the shares through an online brokerage account, and watch the magic happen. Your broker might have a different commission structure for penny stocks, so as always, it’s best to ask your broker about how trading penny stocks will affect your brokerage account.

3.) You Have to Be An Insider to Make Money with Penny Stocks
Believe it or not, being an insider doesn’t garner you much of an advantage as a penny stock investor. That’s because Wall Street is way to preoccupied with more expensive stocks to give penny stocks a second thought.

4.) OTC Stocks Aren’t as Legitimate as Blue Chips
Don’t think that just because a stock isn’t traded on a major exchange like NYSE or NASDAQ that the company is somehow defective.

In fact, the opposite can sometimes be true. Exchanges like NYSE have burdensome listing fees and requirements that preclude smaller companies from getting listed. Some of the most compelling investment stories were those of small companies listed on over-the-counter services like OTCBB or Pink Sheets.

And don’t think that OTC stocks are any more prone to fraud than listed companies are. Stocks listed on services like OTCBB and OTCQX have heightened listing and disclosure requirements over the past decade to help keep things transparent for investors.

5.) There’s No Place for Penny Stocks in My Portfolio
If you think that penny stocks don’t belong in your portfolio, maybe you should take a second glance at what your investment objectives are. While penny stocks have traditionally been riskier choices than their listed counterparts, today’s stock market is bringing that precept into question.

Most portfolios have at least some room for higher-risk/higher-reward investments like penny stocks. That’s especially true if investing in penny stocks doesn’t impinge on your retirement money.

Cheers,
Jonas Elmerraji
November 7, 2008

The Top Five Myths About Penny Stocks was originally featured in the Penny Sleuth.

What’s a Penny Stock?

If you’re new to the game, you might be wondering what exactly a penny stock is. And that’s not a bad question — especially since the answer might be different depending on whom you ask. While some experts say that penny stocks are anything that costs less than $1, others will tell you that’s not the case.

We recently put a report together explaining this a little clearer. Check it out here: Investing in Penny Stocks.

But of all investments out there (well, at least other than subprime debt), penny stocks usually get the worst rap. That’s because with low prices and lower liquidity than most other stocks, they’re easier to manipulate. But don’t let that scare you away from penny stocks.

The Risk-Return Tradeoff

Even though penny stocks are more volatile, they also present investors with the most profit potential. That’s because of the risk-return tradeoff — a principle that says an investment’s payoff rises along with its risk.

Every day there are penny stock success stories, even in a year like this when the S&P has taken a tumble. If you read the Penny Sleuth two weeks or so ago, you heard me recommend XFML, a Chinese financial media stock. Since then, that stock is up 45%, even though the market remains flat.

It’s because of returns like XFML’s that I like to call penny stocks the “Wild West of the investing world.”

Are Penny Stocks Harder to Buy?

But let’s go back to the question at hand: “How do you buy penny stocks?”

The simple answer is, simply, just as you would buy any other stock. Place a trade with your normal broker.

But, to be fair, there is a little more to it than that.

First off, if you’ve never traded penny stocks before, your broker will need to approve you for investing in them, and will send you an information sheet about the risks of penny stocks. But these are mainly formalities.

Two places where you will see a difference with investing in penny stocks are in the commissions you pay and your ability to use margin. Most brokers have a slightly different fee structure for stocks that cost less $1.

Also, some brokers either won’t allow you to use margin to trade penny stocks, or will make you maintain higher minimum margin requirements than you otherwise would have to. As always, it’s best to ask your broker about how trading penny stocks will affect your brokerage account.

If you don’t have a brokerage account yet, check out this free report on picking the right one.

Taming the Wild West of the Market

Hopefully, this little primer on buying penny stocks has shown you that the learning curve for these kinds of investments isn’t quite as steep as some would make it seem.

Penny stocks can be a risky investment to be sure, but if you make informed decisions and approach your penny investments with the same thoroughness and gusto that you would with anything else, you too can unlock a whole lot of profit potential.

Cheers,

Jonas Elmerraji
May 5, 2008

P.S.: I told you about XFML the other week — the company I said has gained almost 50% already — but if you want to hear about the really small stuff, the stuff we can’t talk about in a popular newsletter like the Penny Sleuth, my colleagues Greg Guenthner and Jim Nelson are working on a new issue of Penny Stock Fortunes as we speak.

How to Buy Penny Stocks was originally featured in the Penny Sleuth.

You see, when most people think of penny stocks, they think of one thing: buy tiny companies at extremely low prices and sell high, when these companies are finally discovered by Wall Street. I’ll show you what I’m talking about…

On February 1 this year, O’Reilly Automotive (ORLY: NASDAQ) proposed a buyout of CSK Auto Corp. (CAO: NYSE) for $8 a share. Fortunately for CSK shareholders, their shares had just closed the day before at $5.95. Volume spiked… People went nuts and bought like crazy…

If you had bought just $1,000 worth of shares at the end of trading on January 31, you would have walked away with $580 in pure profits by 12:30 p.m. the next day. This kind of thing shouldn’t shock you. If you are reading this, you already know the enormous potential of these kinds of stocks.

But what would you say if I told you that there was a way you could’ve used that 58% spike to make 500% instantly?

Well, you could have…

You see, people can also buy options on CSK. Options are simply contracts that permits the owner to purchase or sell an asset at a fixed price until a specific date. Meaning, with the added risk of timing the market, the rewards skyrocket.

Take a look at what I mean here…

The same day that CSK’s share price went up 58%, the February $5 calls went from $0.70 per contract to as high as $4.20 per contract. That’s a gain of 500% in just a few hours. And if you had gotten in a week earlier, you would’ve paid just $0.55 a contract and seen a 664% gain!

The same goes for stocks that fall, which we’ve seen plenty of so far this year…

Take a look at radio frequency-components maker, RF Micro Devices, Inc. (RFMD: NASDAQ). In mid-January this year, the company cut its earnings outlook and Wall Street cried bloody murder. Shares fell 25% the day that came out and nearly 44% for the month of January:

If you had $1,000 invested in RF Micro at the beginning of January, you’d be left with only $565 by the end of the month.

Now, if you had bought a handful of RF Micro February 2008 puts at the beginning of the month, it would have cost you only 15 cents a contract. By the end of January, you’d be sitting on contracts worth $1.90 each. That’s a 1,167% gain in one single month!

Hopefully, that answers our dear reader’s question about penny stock options. And the next time we find one like this, we’ll be sure to let you know…

Sincerely,

Jim Nelson
March 14, 2008

P.S.: Unfortunately, we are not market timers. That is key to options trading. Only a select few people in the world have ever been consistently successful at it through the years. We do, however, know of one such person.

And until Monday at midnight, we have something very special for you. Our publisher is giving you the chance to try this options expert out for four months completely free. He does all the hard work. It’ll only take you five minutes a week to see the kinds of profits we mentioned above.

Investing in Penny Stock Options was originally featured in the Penny Sleuth.